We expect Capital One Financial Corporation (COF) to beat expectations when it reports fourth-quarter and full year 2014 results on Jan 21 after the market closes.
Why a Likely Positive Surprise?
Our proven model shows that Capital One is likely to beat earnings because it has the right combination of two key components.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +8.05% for Capital One. This is very meaningful and a leading indicator of a likely positive earnings surprise for the company.
Zacks Rank #3 (Hold): Note that stocks with Zacks Ranks #1 (Strong Buy), 2 (Buy) or 3 (Hold) have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Capital One’s Zacks Rank #3 and ESP of +8.05% makes us confident of an earnings beat. Moreover, Capital One delivered positive earnings surprises in three out of the trailing four quarters, with an average beat of 6.65%.
Factors to Influence Q4 Results
Lower operating expenses, attributable to Capital One’s effective cost-control initiatives, should support its bottom line. Notably, management anticipates marketing expenses to rise on the back of seasonality, loan growth as well as development opportunities in the quarter. However, we believe the company’s efforts to curb expenses will likely be reflected in the upcoming earnings release.
Further, we expect Capital One to reflect sustained loan growth in the quarter, given the consistent improvement in domestic cards and auto loan portfolios. Though the expected mortgage runoff and pressure on commercial loan growth may slightly hamper overall loan growth, management continues to predict pre-provision earnings of around $10 billion, driven by growth in average loans.
Nevertheless, the persistent low interest rate environment will likely exert pressure on Capital One’s revenue growth. Also, the company’s credit quality may remain under pressure, resulting in an elevated provision for credit losses.
Moreover, Capital One’s activities during the quarter were inadequate to win analysts’ confidence. Hence, the Zacks Consensus Estimate remained unchanged at $1.73 per share over the last 7 days.
Other Stocks Worth a Look
Capital One is not the only firm looking up this earnings season. We also expect earnings beats from other finance companies as well:
The Earnings ESP for BancorpSouth, Inc. (BXS) is +3.23% and it has a Zacks Rank #2. It is scheduled to report results on Jan 21.
Associated Banc-Corp. (ASB) has an Earnings ESP of +3.33% and carries a Zacks Rank #3. It is slated to release results on Jan 22.
CIT Group Inc. (CIT) has an earnings ESP of +5.38% and a Zacks Rank #1. It is slated to report results on Jan 27.
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